Demand for retrocession capacity outstrips supply at Jan renewals

Broker Aon Benfield discusses the January renewals and the outlook for the reinsurance market during 2012 in their recently published Reinsurance Market Outlook report. The comprehensive review of the renewals season and the outlook for 2012 suggests that despite the record natural catastrophe losses during 2011 generally insurers have not yet been seeking higher limits or needing to acquire more capital to accommodate reinsurance price rises.
The world’s reinsurance markets responded quickly to the disasters of 2011 and global reinsurance capital remains strong enough to support the needs of those insurers renewing in January. Plenty of competition still exists in the reinsurance market as well, though it is too soon for any M&A activity to really shrink the market after a couple of years of heavy losses. Generally Aon Benfield say that capacity acquired in the January renewals was achieved at accretive prices, price rises have been steep in some disaster hit areas but generally steadier across major lines.

However, Aon Benfields report says that the largest of the loss-affected programs have not yet renewed and are due to renew in mid-year April, June and July renewals. This means that some of the worst hit by catastrophe insurers and governments during 2011 could seek to increase their cover, although Aon Benfield do say that they believe that traditional reinsurers and investors in catastrophe products have sufficient capital to meet this demand.

The retrocession market however was the one area where demand seems to have outstripped supply in January, this despite a number of new players entering the market in late 2011. Demand for retro covers is extremely price sensitive this year and it seems to us that some cover buyers have been trying to play retro providers against traditional reinsurers to keep prices as competitive as they can.

Aon Benfield suggest that this lack of supply may benefit the catastrophe bond market and they expect the cat bond market to provide additional retro type capacity to soak up some of the excess demand through the start of 2012. The report says that incremental demand for some European and U.S. covers was shifted to the cat bond market where there appeared to be greater certainty over pricing when key buying decisions were required. This is positive for the market as historically pricing certainty for cat bonds has been an issue for some sponsors who claimed that they never knew the pricing until too far along the transaction timeline. This is again a sign of the market maturing as pricing becomes more transparent, predictable and acceptable to sponsors.

One other interesting point from the report is that Aon Benfield observed insurers demand for aggregate protections increasing. However this increased interest hasn’t resulted in much additional buying, but it is likely to increase demand and force reinsurers to think hard about their aggregate offering.

We also understand that some insurers in loss hit regions of the world have been seeking multi-year covers during the renewals, some with success in Australia and New Zealand. If demand for multi-year and aggregate covers increases further, particularly likely if we have another difficult year of catastrophe losses, that could translate into increased interest in catastrophe bonds as they are one of the best solutions for insurers seeking those two product features.